Vontier Corporation — Q3 2022 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2022, compared with the corresponding periods ended October 1, 2021. Vontier is a global industrial technology company serving mobility infrastructure, fueling, retail, vehicle diagnostics and repair, and related software markets. It reports one segment.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $788.0M | $768.5M | $2,312.5M | $2,200.5M |
| Gross profit / margin | $359.9M / 45.7% | $346.4M / 45.1% | $1,043.3M / 45.1% | $976.7M / 44.4% |
| Operating profit / margin | $150.2M / 19.1% | $167.4M / 21.8% | $421.5M / 18.2% | $421.3M / 19.1% |
| Net earnings | $50.1M | $127.3M | $333.6M | $300.6M |
| Diluted EPS | $0.32 | $0.75 | $2.06 | $1.77 |
| Operating cash flow | Not separately provided | Not separately provided | $139.8M | $341.9M |
- Revenue and margins: Q3 revenue rose 2.5%; nine-month revenue rose 5.1%. Sales from existing businesses declined 1.9% in Q3 and 0.2% year to date. Acquisition contributions were 7.7% and 7.8%, respectively, while currency translation reduced reported growth by 3.3% and 2.5%. Gross margins improved, but operating margins declined.
- Cash flow: Nine-month operating cash flow fell $202.1M year over year, primarily as receivables and financing receivables used $76.1M of cash and other operating assets and liabilities used $158.4M, versus providing $11.0M in the prior-year period. Investing cash outflow was $326.1M, including $277.1M for acquisitions.
- Liquidity and debt: Cash was $121.7M at September 30, down from $572.6M at year-end 2021. Long-term debt carrying value was $2,635.9M and short-term borrowings were $7.7M. The company reported compliance with debt covenants. It had $50M outstanding on its $750M revolving facility.
- Capital returns: The company repurchased $288M of shares during the first nine months, including a $250M accelerated repurchase, and paid $12M in dividends. Remaining repurchase authorization was $469M.
Changes, outlook and notable items
- Q3 net earnings declined despite higher revenue and gross profit. The quarter included a $65.8M unrealized loss on Vontier’s publicly traded Tritium investment; the prior-year quarter included a $3.2M investment-settlement gain. Interest expense also increased to $17.9M from $12.0M.
- Nine-month earnings included a $32.7M noncash gain from remeasuring Vontier’s previously held Driivz interest when it acquired the remaining shares. The filing also reports a $17.2M unrealized gain on equity securities for the nine-month period.
- Management expected total sales and sales from existing businesses to grow year over year in 2022, without providing a quantified forecast. It expected supply-chain and inflationary pressures to persist and backlog to remain elevated versus historical levels, though potentially below 2021. Management cited price increases and operating-system initiatives as responses.
- A key electronics supplier experienced a cyberattack that halted manufacturing for about three weeks and affected Vontier’s Greensboro factory. Management said it was mitigating the disruption. The filing identifies ongoing risks from component availability, inflation, COVID-19, geopolitical conditions, and energy disruption in Europe; management did not believe the Russia-Ukraine conflict was material to the company as of the filing.
- Vontier acquired Driivz, Invenco, and two other businesses in 2022. Purchase-price allocations remained preliminary for these acquisitions; Invenco consideration included contingent payments initially valued at $9.2M, potentially reaching $100M based on revenue targets. The company classified its Hennessy and Global Traffic Technologies businesses as held for sale; they were not presented as discontinued operations.
- After quarter-end, Vontier agreed to refinance the $600M term loan due 2023 with a new three-year delayed-draw term loan, intended to be drawn by December 30, 2022.
- Asbestos-related claims had gross liabilities of $73.8M and projected insurance recoveries of $37.8M at September 30, 2022. Management said ordinary-course legal matters were not expected to have a material adverse effect.
Investor verification priorities
- Assess the effect of the Tritium investment’s market-price volatility on reported earnings and the valuation of the remaining holding.
- Review cash conversion, working-capital movements, and the sustainability of operating cash flow, which was substantially lower year over year.
- Track acquisition integration, final purchase accounting, and contingent consideration, including Invenco’s revenue-based earn-out.
- Confirm completion and terms of the planned $600M term-loan refinancing, and monitor variable-rate borrowing costs and covenant headroom.
- Monitor execution of the Hennessy and Global Traffic Technologies exits, and the adequacy of asbestos liabilities and expected insurance recoveries.